Net Operating Loss in New York

by Stephen Kass on February 24, 2011

For the New York business operating at a loss, there is no need to worry about finances just like how sometimes there is perfection in imperfection. Net operating losses (NOL) occur when a company generates less income than its operating costs. Net operating losses are assets when a business goes through an acquisition with a company that generates income, or help decrease taxes once the business starts making profits.

An individual or married couple owning a self-employed business, filing a 1040, may see that a NOL when there is a negative number on Line 41, Form 1040. Line 41, Form 1040 shows an taxable income after taking the itemized or standard deduction. Even when an individual taxpayer does not own a business, the individual with casualty and theft losses or business expenses can have a NOL.

If it is a corporation, Line 28, Form 1120 is where to look for the net operating losses. Line 28, Form 1120 shows a corporation’s taxable income before it deducts a NOL or its special deductions.

Net Operating Loss rules generally do not apply to a partnership, limited liability company (LLC), or a shareholder in a S-Corporation. These entities claim businesses losses, subject to the passive activity rules, on an individual tax return.

After determining the NOL, engage an experienced New York tax attorney to assist with the NOL deduction. Using the NOL deduction depends on carryback and carryforward rules which define when and how to take the deduction. Federal income tax laws impose limits on the deductibility of corporate net operating losses depending on whether the corporation experiences a substantial change of ownership. IRC Section 382 discusses the NOL limit.

IRC Section 382 applies when the percentage stock ownership of a corporation operating at a loss, measured by relative value, changes by more than 50 percentage points during a three-year testing period (referred to as ownership change). Instances of ownership change include a public company acquiring all of the stock of another public company, stock acquisitions, a new round of funding, or stock dispositions. On June 11, 2010 the IRS issued Notice 2010-50, explaining that an ownership change cannot occur by a stock value shift.

Net operating losses help offset income in the past or future so a business or individual gets the full benefit of losses. Usually, when a business or entity has a NOL at the end of a year, the business or individual has to carryback the entire NOL to two tax years before the NOL year (carryback period). If there is any NOL leftover after the carryback, the business or individual may carryforward the balance for up to 20 years after the NOL year (carryforward period). When the 20 years is over, the business or individual does not get to deduct the NOLs anymore. This means if a business has too many changes of control or too many years with losses, it may lose its net operating losses.

 

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